Friday, April 10, 2009

Potential Top This Week

Click on Chart to Enlarge

The chart above is SPY as of this week's close. I have drawn some lines, boxes, and notes on there to give some expectations for the next few weeks. I will go into a little detail on these points, but the main reason for these types of posts is always to create ahead of time a logical construct for potential future trades. That way, you know if your logic as applied to the markets is on track, and when it is, trades can be made with relative confidence. When things deviate from that construct, for blog purposes I make trade decisions more mechanical and try to eliminate a pattern type bias as much as possible.

The boxes on the chart are identical in time and price. So I have boxed the correction off the November lows and placed that on top of the March low to give some reference time and price points that should be good guides for this correction if this move up from March is still part of a triple three type pattern I have discussed before. The price high off the November low was made in 29 trading days. The current high is day 26 from the March 6th low. The lime green lines are the low to high projection line from Nov-Jan placed at the March low.

What I am looking for now is for the recent move up from this past Tuesday's low to be retraced in equal time or less than it took to form. Whenever price moves like that (completely erasing a wave up in less time than it took to form), you should pay attention because an important phase of market action has just completed. IF we do see this over the next week or so, then I think it is likely this rally has topped.

The pink horizontal lines are the main price support levels for this rally. I also drew the main support level from the November-January rally because it shows what has been typical in this bear market. Once the rally tops, there is a relatively quick move down to undercut recent support. Then there is a reactionary rally that peaks below the high of the overall advance, followed by more directional downward price movement. I made a post last February showing several examples of this during this bear market.

Once it appears that the rally has topped, my focus for blog trades will be almost exclusively on bearish trades, with the possible exception of a bullish trade at the support levels discussed if things follow this scenario. Basic technical indicators (short-term RSI, MACD, momentum, etc.) are starting to show bearish divergence on these recent new highs. From both a pattern and technical analysis standpoint, the table seems set for a sizeable decline, though it is hard to train yourself to think that way as the media, etc. becomes more bullish and "news" becomes more positive (or at least price responds positively to the news).

As far as blog trades go, sit tight on QID until the next oversold signal
. Also, the short-term model could be interpreted as showing a bearish divergence against price on this high, so I may suggest re-entry into BGZ as soon as Monday. I will post again if/when that is the case.

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